Banks could start to get very choosy

The alarm bells rang when one real estate agent warned about a finance problem. “I have a couple of one-bed units [under 50 square metres in size] for sale at the moment but it seems impossible for buyers to get finance now,’’ he says.

It’s a finding that runs counter to the current view – that the banks are freeing up their lending rules.

(Well, freeing up in the face of rising interest rates. Fixed rates are on the rise and flexible rates may well rise again next week).

Nevertheless, many expect that the banks will start to become more discriminating about how and where they lend.

Much of their money comes from overseas – a source that is already under pressure from the current furore over Australian house prices and will come under more pressure as global rates rise. Ratings agency Fitch yesterday announced a stress test of the banks’ ability to withstand a house price decline.

Fitch’s Australian managing director, Ben McCarthy, says a house price downturn is not Fitch’s “central expectation’’.

But the agency has been forced to respond to “numerous inquiries about the sustainability of Australian residential property’’ with a test for robustness.

The banks could address the inevitable increase in the wholesale cost of funds by raising mortgage rates outside the Reserve Bank cycle but that is a blunt and politically ugly response. Less conspicuous would be a subtle rationing.

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After all, they already adjust lending policies – such as loan to valuation ratios – on address, on style of property and borrower.

Research by mortgage broker Alliance Financial Group reveals that the big four banks have tightened their lending for Melbourne apartment projects.

Loan to valuation ratios have been increased, lending to student apartments has been reduced and the proportion of lending to offshore borrowers in any one apartment project further curtailed.

Mark Hewitt, the general manager of leading mortgage broker AFG, says that “generally speaking’’ the banks have become more competitive.

“We are seeing increased loan to valuation ratios, and competition on pricing and product features.’’ But there’s a but. “There are segments of the market that banks are shy of, like units under 50 sq m and a concentration in any one apartment project,’’ he says.

“We are also seeing mortgage insurers selective about post codes.’’

Mortgage Choice, which brokers around 40,000 loans a year, also reports a “slight’’ loosening in lending.

Policies have been relaxed a tad in places like Orange in rural NSW, Cranbourne on the Melbourne fringe and mining centres like Kalgoorlie and Mt Isa.

And some lenders, such as Macquarie Group and CUA, are offering spring specials.

Brian White
, the chairman of Ray White Real Estate Group and its subsidiary, Loan Market, says the banks now have so much information that they can adjust their policies, and their risk, almost street by street.

“It’s not because they have a jaundiced view of the market, it’s because they have been so successful,’’ he says.

“We see this as the banks running a good business rather than turning their back on one part of the market.’’

White says finance brokers – and Loan Market has 550 of them broking about $6 billion a year – have to understand the subtlety of the banks’ policies. So will owners, borrowers, real estate agents, valuers and developers.